Give your investments a Happy New Year
1. Quit burning your savings
2. Get in shape with your shares
- Is your share portfolio diversified? Share markets move in cycles so it’s better to spread the risk across different asset classes.
- Do your shares fit with your risk profile? It is often said the higher the potential return, the greater the risk to your funds. You need to find a balance you are comfortable with.
- How much of your share’s overall return is made up of income and how much is made up of growth? Income tax must be paid on any income received from shares, while capital gains tax (CGT) must be paid on any capital gain at the time of selling a share. People on higher tax brackets sometimes prefer to hold shares that are mainly made up of growth. This means they can defer paying tax until they sell their shares. By then they may be working less and on a lower tax rate. And if they’ve held their shares for over a year they could receive the 50% CGT discount. On the other hand, retirees, who are not earning an income from work, may need a higher income from their shares.
- Do your shares provide franking or imputation credits? For Australian investors, dividends are often worth more than the cash payment received. Many dividends are paid with franking credits attached to pass on the value of any tax a company has already paid on its profits. These entitle investors to a tax offset or a reduction in the amount of tax to be paid.
3. Get active with your super
4. Know the rules
- From 1 July 2007, most super lump sums and pensions will be tax-free once you reach age 60. So if you going to be 60 or over at this time, you may wish to hold off drawing down super until then.
- Reasonable Benefit Limits will be abolished from 1 July 2007, making super an even more attractive savings vehicle. RBLs are the maximum amount of super benefits you can receive over your lifetime at concessional tax rates.
- From 1 July next year, the maximum amount you will be able to salary sacrifice before being taxed at the top marginal tax rate will be a flat $50,000 pa (or $100,000 until 2011/12 if you are over 50). Until then, if you work for multiple employers, you may want to take advantage of the fact each can salary-sacrifice contributions on your behalf up to your age-based limit.
- From 1 July, 2007, after-tax contributions will be restricted to $150,000 pa, or $450,000 over a three-year period for a person younger than 65. Any deductible or after-tax contributions in excess of the relevant limit will be taxed at the top personal rate plus Medicare. But until 30 June 2007, it will be possible to make after-tax super contributions of up to $1 million. See resolution 5 for ways to take advantage of this opportunity.
- In addition to the contribution caps, it will be possible to contribute amounts up to $1 million from sale of business assets. It will be possible to contribute payments received as settlements for injuries resulting in permanent disablement, without any limit.
- From 10 May 2007, there will be no rules requiring the compulsory payment of super benefits except on the death of a member.
- In certain circumstances, employer termination payments may be rolled over to super up to 2011/12.
5. Take advantage of a million dollar opportunity
The $1 million window will be open for anyone under 65, whether working or not, and anyone between 65 and 74 who works 40 hours in any month. From 1 July, there will be a restriction of $150,000 pa, or $450,000 over three-years for people under 65.
The benefit of holding money in super is that while income earned from other investments will be taxable, after 1 July next year income earned from super will not, so long as it is taken out after you turn 60. So the chance to contribute $1 million into super presents an important planning opportunity.
You may want to discuss some possibilities with your financial adviser such as cashing in assets, investment properties or direct shares (up to $1 million) and contributing funds into super. Another strategy might be to transfer assets into a self-managed super fund via an in-specie transfer. Of course, you will need to take into account any tax implications and pay special attention to your super fund. Most importantly, you will to make sure it is well diversified - $1 million is a lot of money to put all in one place.
A separate once in a lifetime opportunity has also been proposed for business owners who have held their businesses for 15 years. If the proposals become law, business owners will be able to contribute an additional $1 million from the sale of their business into super. This means a couple running a small business could potentially contribute up to $4 million into super next year.
Of course these are all huge decisions and proposals have yet to become law. So think carefully and consult your financial adviser.